and the Aging of America Richard Jackson President Global Aging - PowerPoint PPT Presentation

1 Social Security and the Aging of America Richard Jackson President Global Aging Institute CCA Webinar January 11, 2017

Background 2 Social Security consists of two separate As of the end of 2015, the combined OASDI trust   programs: Old-age and Survivors Insurance funds held $2.8 trillion in assets, which, together (OASI) and Disability Insurance (DI). with future earmarked tax receipts, are projected to keep Social Security solvent until 2034. Social Security is financed primarily by FICA taxes  levied on earnings up to a taxable wage ceiling, Solvency, however, is not the as thing as  now set a $127,200. The combined OASDI tax sustainability. Its trust funds notwithstanding, rate is 12.4 percent, of which 10.6 percent is Social Security operates on a purely pay-as-you-go allocated to OASI and 1.8 percent to DI. basis. It is already a burden on the budget — and that burden will grow dramatically as America ages. The Social Security benefit formula is  OASI Replacement Rates for Workers Retiring progressive. Although higher earners receive at Age 65 in 2015, by Earnings History larger total benefits in dollars, lower earners receive higher replacement rates. The full benefit retirement age, which was 65  for most of Social Security’s history, is now rising in stages to 67. Actuarially reduced early retirement benefits are available at 62. The last major reform of Social Security was  Note: Low earners are assumed to have earned 45 percent of the enacted in 1983. In addition to raising the average wage in OASDI covered employment throughout their careers, while high earners are assumed to have earned the maximum taxable wage. retirement age, it raised payroll taxes in order to partially prefund the Baby Boom’s retirement. Source: Social Security and Medicare Lifetime Benefits: 2015 Update (Urban Institute, 2015)

3 The Challenge

4 By developed-world standards, the United States is and will remain a relatively young country. Percent of the Population Aged 60 & Over in 2010 and 2040 50% 43% 40% 39% 40% 33% 31% 30% 30% 30% 29% 30% 27% 26% 26% 26% 25% 23% 23% 22% 20% 19% 19% 20% 10% 0% Source: World Population Prospects: 2012 Revision (New York: UN Population Division, 2013) 2010 2040 Source: UN Population Division (UN, 2013)

Although the United States will not age as much 5 as other developed countries, its large Baby Boom means that it will age more rapidly than most. Between 2015 and 2050, the  Average Annual Growth Rate in the Population number of Social Security Aged 60 & Over from 2010 to 2040 beneficiaries will increase from 2.5% 60 million to 97 million. 2.2% 2.1% 2.0% Meanwhile, the Social Security 1.9%  “support ratio” of contributing workers to retired beneficiaries 1.5% 1.5% will fall from 2.8 to 2.1. 1.3% 1.3% 1.3% 1.0% A falling support ratio in turn 1.0%  1.0% translates directly and 0.6% proportionally into a rising cost rate for pay-as-you-go 0.5% pension systems. 0.0% Source: UN Population Division (UN, 2013)

6 Social Security will come under mounting fiscal pressure as the Baby Boom retirement enters full swing. The Social Security Trustees publish  OASDI Cost, as a Percent of Taxable Payroll, three alternative projections each History and Alternative Projections, 1990-2090 year based on different demographic and economic assumptions. While OASDI Cost Rate in 2015: 14.1% the intermediate projection is the Intermediate Projection for 2090: 17.7% “official” projection, the high -cost High-Cost Projection for 2090: 24.9% projection is equally plausible. Key Assumptions Intermediate High-Cost Fertility Rate 2.0 1.8 Life Expectancy in 2050 82.8 84.9 Net Immigration 1.2 million 0.9 million Real Wage Growth 1.2% 0.6% Note: Except for life expectancy, values refer to “ultimate” assumptions. Source: 2016 OASDI Trustees Report

7 Although its trust funds are projected to be solvent until 2034, Social Security is already running growing cash deficits that add to the overall budget deficit. OASDI Cash Balance, as a Percent of Taxable Payroll, The Social Security trust funds are  History and Intermediate Projection, 1970-2090 memo accounts within the federal budget. Trust-fund assets constitute budget authority, but do not represent savings that can be drawn down to pay benefits. 2010: First Cash Deficit Economically, all that matters is  the annual difference between Social Security tax revenues and Social Security outlays. 2034: Trust Fund Exhaustion Between 2010 and 2034, while  Social Security’s trust funds are still “solvent,” its growing cash deficits will add $3.5 trillion in today’s dollars to the federal deficit. Source: 2016 OASDI Trustees Report

Understanding the Colossal Liability Numbers 8 Social Security’s actuarial deficit, the  Alternative Measures of OASDI’s Unfunded Obligations official measure of the program’s as of January 1, 2016, in Trillions of Dollars funding shortfall, is equal to the present value of projected benefits over the next 75 years minus current trust-fund assets and the present value of projected taxes. Social Security’s open group obligation,  which dispenses with the arbitrary 75- Equivalent to 2.7% of taxable year time horizon and assumes the payroll over the program will continue indefinitely, next 75 years. provides a more meaningful measure of Social Security’s funding shortfall. Social Security’s closed group obligation  represents the subsidy that today’s adults expect from future generations of workers and taxpayers. As such, it provides a measure of the cost of transitioning from today’s pay -as-you- go system to a fully funded system. Source: 2016 OASDI Trustees Report

Beyond Sustainability: A Deteriorating Deal 9 Real Rate of Return on OASI Contributions for Average- While early cohorts of Social  Earning Workers Retiring at Age 65, 1965-2015 Security retirees received benefits far in excess of the value of their contributions, current and future cohorts will be lucky to break even. The rate of return on contributions  for high earners is already well beneath the risk-free rate of return. Upon trust-fund bankruptcy in 2034,  benefits will have to be cut by 20 Real Rate of Return on OASI Contributions for Average-Earning percent beneath current-law levels. Workers Retiring at Age 65 in 2015, by Earnings History This cut would turn most average earners into net losers as well. Note: Low earners are assumed to have earned 45 percent of the average wage in OASDI covered employment throughout their careers, while high earners are assumed to have earned the maximum taxable wage. Source: Social Security and Medicare Lifetime Benefits: 2015 Update (Urban Institute, 2015)

Directions for Reform 10 10 Paradigmatic Reforms Structural Reforms Increase Contributions . There are two Notional Defined Contribution   ways to increase contributions: System. Transform Social Security Increase the FICA tax rate or raise (or into a notional defined contribution eliminate) the taxable wage ceiling, system in which benefits are usually called the “max tax.” proportional to contributions. Index benefits to offset the impact of population aging. Handle Cut Benefits Across-the-Board. The  redistribution through a separate flat most common proposal is to further benefit or means-tested supplement. increase the normal retirement age and/or index it to life expectancy. Retirement Income Backstop .  Refashion Social Security as a Cut Benefits Progressively . Initial  retirement income backstop for the benefits for higher earners can be cut by “old old ” rather than a retirement altering the brackets in the Social income floor for all of the elderly. Security benefit formula. Benefits in current payment status can be cut through “progressive indexing.” Personal Accounts System .  Transform Social Security in whole or in part into a mandatory system Increase Eligibility Ages. Increasing  of funded personal accounts. Social Security’s early retirement age would both reduce lifetime benefits and increase lifetime contributions.

11 11 A Broader Perspective

12 12 As America ages, the cost of health-care programs will grow even more rapidly than Social Security. Entitlement Spending by Type, as a Percent of GDP: 2000, 2015, and Average for 2037-46 *Includes Medicare, Medicaid, CHIP, and ACA subsidies. Source: The Budget and Economic Outlook: 2016-2026 and The 2016 Long-Term Budget Outlook (CBO, 2016)

13 13 The intractability of health-care cost growth makes finding savings in Social Security even more urgent. Average Annual Growth Rate in Real Age-Adjusted Average Annual Growth Rate in Real Age-Adjusted Because Medicare is growing more  Per Capita Public Health-Care Spending, 1985-2010 Per Capita Public Health-Care Spending, 1985-2010 rapidly than Social Security and constitutes a larger part of the long- 5.0% term budget problem, some experts conclude that Social Security reform 4.1% is less urgent or even unnecessary. 4.0% 2.9% 2.9% What matters for the budget, the  3.0% economy, and the after-tax living 2.1% 2.2% 2.3% standard of future generations is the total transfer burden of old-age 2.0% 1.4% 1.4% 1.6% 1.7% benefits, not which federal programs are collecting the taxes 1.0% and dispensing the benefits. 0.0% Source: OECD Health Data 2012 (OECD, 2012)